The Financial Markets Authority (FMA) has successfully prosecuted the first case of insider trading in New Zealand.
The case highlights the insider trading prohibitions in the Financial Markets Conduct Act 2013 (FMCA) and the serious consequences that can flow from breaches of those provisions.
This case involved an employee (Mr Honey) who worked for ERoad Ltd, which is a public company listed on the NZX.
Mr Honey was employed as an insights and analytics manager at ERoad and he was prosecuted by the FMA for the offence generally known as ‘‘tipping’’.
That offence is set out in section 243 of the FMCA, which provides that a person who is an ‘‘information insider’’ of a listed company (i.e. a person who has material information not available to the market) must not advise or encourage another person to trade or hold shares in the company.
The consequences of breaching that provision are serious — the maximum sentence can be a term of imprisonment of up to five years and a fine of up to $500,000, or both.
In this case, Mr Honey (as part of his work) obtained a report about ERoads United States sale summary which indicated that the company’s sales in the United States were not doing as well as had been originally hoped.
At that time, ERoad entered into a ‘‘black out period’’ to prohibit employees trading shares and the company took various steps to ensure that all employees were aware of the prohibition because of the material information that was available to employees at that time.
However, despite that, Mr Honey sent a text message to another person who had previously worked at ERoad (Mr Y) with a copy of the confidential information about the US market performance and accompanied by a message saying ‘‘US sales not doing too well, time to sell up, confidential obviously’’.
Mr Y replied to that text stating ‘‘Youre a bad boy, but thanks’’ (though Mr Y also sent a separate response saying he was going to sell down significantly anyway). Mr Y then proceeded to trade shares in ERoad at a share price of $3.41 per share.
A few days later, ERoad released an announcement via the NZX advising that there would be lower sales in the US and the net profit for the year to March 31, 2016 was forecast to be $500,000 compared to the previous forecast of $5.3 million.
Not surprisingly, ERoad’s share price started to fall and by the end of that week the share price was $2.60 per share, representing a 21.7% decrease since the company’s announcement.
The FMA subsequently began an investigation of the share trading by Mr Y and then brought separate prosecutions against both Mr Honey and Mr Y.
Mr Honey pleaded guilty to the charge of advising or encouraging another person to trade financial products, i.e. ‘‘tipping’’, and therefore the District Court judge’s decision is concerned with what the appropriate sentence was for Mr Honey.
As mentioned previously, the maximum liability under the FMCA is imprisonment of up to five years and a fine of up to $500,000. However, in this case, Mr Honey was sentenced to six months’ home detention.
In reaching this decision the judge considered all of the circumstances of the offence and various mitigating factors as well as considering overseas case law on insider trading cases (given that this was New Zealand’s first such case).
The judge noted the viability of New Zealand’s financial market depends on public trust and confidence in the integrity of the market and therefore ‘‘deterrence’’ is a paramount consideration in deciding on the appropriate sentence.
In this case the judge decided that the appropriate starting point for sentencing was 12 months’ imprisonment, but he gave a two month reduction after taking into account various mitigating issues that were personal to Mr Honey.
The Judge also gave a further 25% discount to give credit for Mr Honey’s guilty plea which resulted in a provisional sentence of seven and a-half months of imprisonment.
That period then brought the sentence within the scope of home detention and ultimately the judge decided on a sentence of six months’ home detention.
Mr Y also faces a separate charge of insider trading and it will be interesting to see the outcome of that prosecution.
Given that Mr Y made a financial gain from the trading it may be that (if he is found guilty) the sentence is not so lenient.
●David Smillie is a partner in the law firm Gallaway Cook Allan, Lawyers.
